LLP Significant Beneficial Ownership: Rules, Compliance and Impact

Introduction: The dawn of the LLP (Significant Beneficial Owner) Rules, 2023, ushered in a new era of transparency and accountability in the landscape of corporate governance. Enacted by the Ministry of Corporate Affairs on November 9, 2023, these rules exert their influence on Limited Liability Partnerships (LLPs), promising to thwart money laundering and foster openness in ownership structures. With applicability extending to LLPs incorporated both before and after the rule’s commencement date, their impact is far-reaching. As we embark on a journey through the intricacies of these regulations, this article endeavors to dissect the definitions, compliance mechanisms, and broader implications of Significant Beneficial Ownership in LLPs. It serves as an indispensable guide for stakeholders navigating the complexities of this transformative regulatory landscape.

On November 09, 2023, MCA issued the LLP (Significant Beneficial Owner) Rules, 2023

↓

These rules came into effect w.e.f. Nov 09, 2023 and applicable on all the LLP's Incorporated till this date and
to be incorporated after this.

SHORT SUMMARY:

The author will cover “Everything about Significant Beneficial Owner on LLP’s” in this column.

The provisions of SBO provided in Section 90 of Companies Act, 2013 read with rule 9 of the Companies (Management and Administration) Rules, 2014 for the purpose of Companies.

Provisions of LLP Act 2008:

• Rule 1-10 of LLP (SBO) Rules, 2023.

BACKGROUND:

First time Ministry has introduced the provisions of Significant Beneficial Owner in LLP Act, 2013.

The issue of the misuse of multi-layered corporate entities has grabbed attention of various policymakers and regulators. Regulatory authorities have adopted a step-by-step approach and tried to address this issue by enacting various legislations, notable among them being:

OBJECTS

> To Close the loop on Combating Money Laundering

> Transparency

> The mandate of the Rules is to “look through” the entire maze of intermediate entities and identify the ultimate individual owners of a company.

> Identify individual who ultimately holding significant beneficial ownership

A. Basic Terms to understand the Concept:

I. Registered Partner: means a person whose name is entered in the register of partner of a LLP as the holder of contribution in that LLP but who does not hold beneficial interest in such contribution;

In general words,

√ this person are not an actual owner of contribution.

√ Only his name is entered into register of partner.

II. Beneficial Partner: Every person who holds or acquires a beneficial interest in contribution of a Limited Liability Partnership, but his name is not registered in the register of partners.

In general words,

√ Beneficial partner is actual owner of the contribution.

√ Only his name is not entered in the register of partner.

√ He is entitled to all beneficial interest on such contribution.

III Beneficial Interest: A beneficial interest is the right to receive benefits on contribution held by another party. Beneficial interest is often referred to in matters concerning trusts, whereby one has a vested interest in the trust’s assets. A beneficial interest is “that right which a person has in a contract made with another (third party)”.

Example: Mr. D desires to hold complete ownership of GDA LLP, but due to the mandatory minimum number of partners, he cannot do so alone. Thus, he may present Mr. P as a representative to fulfill the minimum requirement of at least two partner. Mr. P’s name would be listed on the register of partners, although he would indirectly serve as the LLP’s owner (beneficial owner) and controller.

In this scenario, Mr. P serves as the registered partner, while Mr. D serves as the beneficial partner, with GDA LLP serving as the LLP.

B. Significant Beneficial Owner:

Every individual,

> who acting alone or together, or

> through one or more persons or trust,

Possesses one or more of the following rights or entitlement in such reporting LLP

Hold Indirectly OR together with Direct Holding

I. Not Less than 10% of Contribution;

II. Not less than 10% of Voting Right in respect of the management or policy decision in such LLP;

III. Has right to receive or participate in not Less Than 10% of the total distributable profit, or any other distribution, in a financial year (through indirect holding or together with any direct holding)

IV. Has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings along.

NOTE:

EXPLANATION-1: If an individual does not hold any right or entitlement indirectly under clause (i), (ii) (iii) and (iv) as mentioned above. He shall not be considered to be a significant beneficial owner.

DIRECT HOLDING OF RIGHT AND ENTITLEMENT:

Meaning of Hold ‘Right or Entitlement Directly” an individual shall be considered to hold a right or entitlement directly in the reporting LLP, if he satisfies any of the following criteria, namely:-

a. The Contribution in reporting LLP representing such right or entitlement are held in the name of Individual;

b. The individual holds or acquires a beneficial interest in the Contribution of the reporting LLP under Rulle 22B(2), and has made a declaration in this regard to the reporting LLP.

INDIRECT HOLDING OF RIGHT AND ENTITLEMENT:

Meaning of Hold ‘Right or Entitlement Indirectly” an INDIVIDUAL shall be considered to hold a right or entitlement directly in the reporting LLP, if he satisfies any of the following criteria, in respect of a member of the reporting LLP, namely:

A. Body Corporate Member:

Where the member of reporting Company is a body corporate.

Note:

• Whether incorporated or registered in India Or
• Whether Incorporated or registered in abroad.
• Other than a Limited Liability Partnership and
• the Individual-

a. Hold majority stake in that Partner (means such individual hold majority stake in that body corporate partner); or

b. Hold majority stake in the [1]ultimate holding Company of that Partner

“Majority Stake” means;-

(i) holding more than one-half of the equity share capital in the body corporate; or

(ii) holding more than one-half of the voting rights in the body corporate; or

(iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate.

B. HUF Partner:

Where the member of reporting LLP is a HUF and individual is Karta of the HUF

C. Partnership Entity Partner:

Where the member of reporting LLP is a Partnership Entity and the Individual

Note:

• Firm is member through itself or
• Firm is member through partners.

a. Is a partner; or

b. Holds majority stake in the body corporate which is a partner of the partnership entity; or

c. Holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity;

D. Trust Partner:

Where the member of reporting LLP is a Trust (through trustee) and the Individual

a. Is a trustee in case of a discretionary trust or a charitable trust;

b. Is a beneficiary in case of a specific trust;

c. Is the author or settler in case of a revocable trust.

E. LLP Partner:

Where the member of reporting LLP is a LLP:

d. A pooled investment vehicle; or

e. An entity controlled by the pooled investment vehicle.

Checks for SBO Disclosures:

1. There should be a Natural Person.

2. Individual having beneficial interest not less than 10% of contribution.

3. Individual holding contribution indirectly or together with direct holding

Note: Only direct holding of contribution shall not considered as SBO

i. Whether a Company/ Trust/ Body Corporate/ Partnership firm can be Significant Beneficial Owner?

 As per LLP (SB) Rules, 2023, only a Natural Person (individual) can be Significant Beneficial Owner. For the purpose of significant beneficial owner, in case of ‘person other than individuals or natural person’, shall be determined as under:

 ii. If an individual holding interest in contribution less than 10% whether SBO rules shall apply on such person

First Condition for applicability of SBO Rules and LLP (SBO) Rules, 2023 i.e. Natural person should have at least 10% of interest in ‘Contribution’ indirectly or together with direct holding”. (Indirect contribution is mandatory)

Example:

Capital Structure of Company GDA LLP is as following:

• Capital Contribution Rs. 1,000

Mr. DG beneficially holds Rs. 260 capitals of LLP. Whether Mr. DG beneficially required giving disclosure under SBO?

Solution:In the above mentioned exampl; Mr. DG holding contribution as beneficially. As per

Explanation I:- Individual should hold alteast any no. contribution Indirectly.

Explanation II:- A individual shall consider holding of contribution indirectly if, the individual holds or acquires contribution through Body Corporate, Trust, HUF etc in the share of the reporting company.

Conclusion: Therefore, in above mentioned Example Mr. DG shall not considered as Significant Beneficial Owner and no need to file any disclosure of SBO.

[1] Whether incorporated or registered in India or abroad

[2] Whether incorporated or registered in India or abroad

*****

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).